four
5,087 posts
msg #135574
- Ignore four |
4/23/2017 3:25:02 AM
A Risk Free Options Trading Example
http://optiontradingfortune.com/risk-free-options-trading.html?doing_wp_cron=1492932049.3858509063720703125000
The market price of XYZ is currently $61.35. You buy 1,000 shares and simultaneously sell 10 x $60 call option contracts, receiving a premium of $4.90 per contract, or $4,900. You also buy 10 x $60 put option contracts at $3.10 per contract (they are ‘out of the money’ therefore cheaper) which costs you $3,100. The overall credit is $1,800.
The difference in option premiums above is $1.80 but the difference between $61.35 and $60.00 strike price is only $1.35. The 45 cents therefore is immediate locked in profit, no matter what happens after that.
Let’s say that by options expiration date, the share price has risen to $65. Your bought put options will expire worthless and your sold call options will be $5,000 in loss. But your purchased shares will be $3,650 in profit. The difference between these two is $1,350 loss. But you have received $1,800 credit from your option strategy so you make an overall $450 profit, less brokerage costs.
Call options by nature, are normally more expensive than put options, because their upside potential intrinsic value is unlimited, whereas the intrinsic value in put options can only be the difference between the current share price and zero. But if you understand something about implied volatility in option pricing, you will understand that this may not always be the case.
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mahkoh
1,065 posts
msg #135575
- Ignore mahkoh |
4/23/2017 3:31:01 PM
I'm sceptic. I have learned that whenever I bump into something that seems to good to be true it usually is.
I'm assuming the described situation is not likely to occur for options on SPY, IWM, BAC, AAPL etc. I think the algos would be all over it and arbitrage the opportunity away long before you would even have a chance to set up an order. This would leave you with thinly traded options which typically have larger spreads. Upon finding an opportunity you can create a spread for your desired credit, but you cannot realistically expect this to be filled immediately. And when it does will the underlying still be at a price that will render the trade profitable?
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BarTune1
441 posts
msg #135577
- Ignore BarTune1
modified |
4/23/2017 9:15:57 PM
You will never be able to get the pricing suggested in the example .... the put call combo is a synthetic short ... so even if you are able to obtain some sort of "premium" which has been referred to as a "locked in profit" ... it is offet by the cost of carry of holding the shares ... there is always an implied interest charge embedded in the cost of options ...
Having to contend with slippage from bid-ask spreads, when entering the position .... and or exiting the position(s) ... as well as transaction costs (commissions and if applicable option assignment costs) this transaction can't really be done profitable at the retail level ...
An insitution would have trouble generating a profit with such a transaction also ... and if they could ... they would already be doing it ...
The "no-arbitrage" aspect of derivative pricing theory would result in the pricing of the options to yield no guaranteed profit .... and if there was an abritrage opportunity ... it would be very short lived ...
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dashover
226 posts
msg #135594
- Ignore dashover |
4/25/2017 10:18:44 AM
I've been looking for the holygrail no risk option spread collar etc. for 30 years..
Wide spreads in options sometimes show up in scanners suggesting no risk trades, but in reality they are almost never able to be filled.
Simply never exists.
BTW even though I am somewhat directional, I highly recommend the daily podcasts at
https://www.stocktwits.com/chicagosean/message/75003806
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BarTune1
441 posts
msg #135605
- Ignore BarTune1 |
4/25/2017 1:16:42 PM
Exactly .... and whenever you see a marketed options trading system that infers you can generate similar risk free profits ... you are pretty much assured it is a scam ... a site run by people that have no experience in actually trading such positions ... I'd love to ask some of these clowns "Do you actually trade this yourself?" ...
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four
5,087 posts
msg #135687
- Ignore four |
4/28/2017 11:12:31 PM
thanx--for the thoughts
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Eman93
4,750 posts
msg #135688
- Ignore Eman93
modified |
4/29/2017 2:22:16 PM
example:
Stock DDD 15.88 You think its going to be less than 16 by the end of the week - Friday May 5
Sell 1 of the weekly DDD 16.00 call @ 0.53 for a credit of $53
Set a stop limit buy for 100 shares at 16.50 to cover your call (stop loss) flat.
Only risk you can not control is a big gap up. you could do this with index etfs.
Example yields 3.3% per week. 53/1600 = 0.033
If you do this every week = 12% say you won 1/2 the time you still get 6% per month. 72% per year.
You only get your max if expires out of the money.
Reverse for puts, you would need to short the stock to cover your put, this is more expensive due to the borrow cost.
Stocks in a downtrend or in a sideways trend at resistance and overbought.
GLT..
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mahkoh
1,065 posts
msg #135689
- Ignore mahkoh |
4/29/2017 6:43:00 PM
What if DDD goes to 16.50 and after you buy 100 shares it tanks?
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Eman93
4,750 posts
msg #135701
- Ignore Eman93 |
4/30/2017 8:25:41 PM
Yep you need to manage your trade.
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gmg733
788 posts
msg #135703
- Ignore gmg733 |
4/30/2017 11:19:05 PM
There is no arbitrage anymore. Everything is pretty much priced to perfection.
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